MOSCOW. (RIA Novosti economic commentator Nina Kulikova) - Foreign direct investment (FDI) in Russia nearly doubled in 2006, reaching $28.4 billion versus $14.6 billion the previous year, according to a recent report by the United Nations Conference on Trade and Development (UNCTAD).
This makes Russia the largest FDI recipient of all the countries in southeast Europe and the Commonwealth of Independent States.
The geography of FDI is gradually expanding. The main factors behind Russia's investment attractiveness are high economic growth rates, a consumer boom, and the huge potential of the domestic market. For several years in a row, Russia's GDP has been growing by 6% annually. Growth reached 6.9% in 2006 compared with 6.4% the previous year.
Russia's financial reputation is also improving. This mostly rests on the substantial reserves of its Stabilization Fund, made up of surplus revenues from oil and energy exports. The fund's balance more than doubled in 2006, to over $90 billion as of January 1 of this year. Russia's international reserves went up 66.7% last year (to $303.7 billion), providing the economy with additional protection from external shocks.
Taken together, this is proof of Russia's macroeconomic stability, solvency, and ability to guarantee the stability of its currency.
The capitalization of the Russian stock market exceeded $1 trillion at the end of 2006. Last year, the RTS index (the main indicator of stock market development in Russia) increased 65%, posting one of the world's best results.
The investment climate is improving in Russia largely thanks to the authorities' fiscal policy, primarily their decision in 2006 to repay state debts ($21.3 billion) to the Paris Club of Creditors ahead of schedule and to lift the remaining currency restrictions.
The completion of bilateral talks on Russia's accession to the World Trade Organization in November 2006 came as an additional encouragement to foreign investors.
According to Fitch and Standard & Poor's, the world's leading rating agencies, Russia's sovereign-debt rating is only one step below grade A (high solvency).
Other Russian advantages are a large number of educated specialists and skilled workers, as well as low production and energy costs.
On the other hand, foreign investors face quite a few problems in Russia stemming from its peculiar laws and the difficulties of navigating its bureaucracy. According to the Russian Economic Development and Trade Ministry, foreign investors polled in 2006 said red tape and administrative obstacles were bigger problems than even corruption. They also noted the low quality of corporate governance and the lack of transparency in the judicial system.
Foreigners are mostly attracted to Russia's fuel-and-energy and steel industries, although they are now investing more in its manufacturing sector, wholesale and retail trade, transport, and communications, as well as getting involved in real estate transactions.
The Russian authorities have formulated a plan for economic diversification, and are extending the list of investment tools and devising new mechanisms for attracting investment, such as the Investment Fund, public-private partnerships, special economic zones and IT parks. These instruments should attract foreign investment in transport and high technologies.
The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.